States Seek to Refine 'All-Payer' Hospital Payment Systems

Maryland's switch to global budgets working well so far, say observers

As Medicare officials continue to refine that program's system for paying physicians, several states are experimenting with changes to the way their hospitals are reimbursed.

The granddaddy of unique hospital payment systems is Maryland, which started an "all-payer" reimbursement system in the 1970s. Under that system, hospitals were all paid the same rates by all the payers -- Medicare, Medicaid, private healthcare plans, and uninsured individuals. The rates were established by the state's Health Services Cost Review Commission (HSCRC).

Many Payers, Same Rate

"Under that system for decades, the way it worked was if you were going to get an appendectomy at [a particular hospital] you were going to pay $1,000, whether you were Medicare, Medicaid, private insurance, or paying out of your own pocket," said Joe Antos, PhD, scholar in healthcare and retirement policy at the American Enterprise Institute and HSCRC vice-chairman. "But if you were getting it at [another hospital], the price might be different ... It varied depending on the hospital, but [at that hospital] the price was the same for everybody."

However, this system ended up being expensive for the Centers for Medicare and Medicaid Services (CMS), since it was paying Maryland more on average for hospitalized Medicare and Medicaid patients than it was paying any other state, explained Karoline Mortensen, PhD, associate professor for health sector management and policy at the University of Miami Business School in Coral Gables, Florida. This was especially problematic as more Medicare patients began using outpatient care for procedures that were formerly performed in the hospital.

"[That was] making the metrics look all messed up," said Mortensen. "CMS said, 'You need to do something different or you will lose your waiver for the all-payer system.'"

So starting in 2014, armed with a new waiver from CMS, the state began using a "global budget" system in which each hospital is paid a set amount of money -- again, contributed by all payers -- to take care of all its patients. "What they did with these hospitals is look at historic revenues -- how much were they getting in 2013 -- and gave the hospital a little above that number," she explained.

Generally, hospitals seem fairly happy with the system, said Gene Ransom, JD, CEO of MedChi, The Maryland Medical Society, in a phone interview. "Hospitals are doing well although I think some of the hospitals [with out-of-state branches] would tell you they have better profit margins in other states," he said, adding that this may be partly because all the hospitals in Maryland are non-profits. As physicians, "We just want to make sure patients are taken care of and that we're getting treated fairly in the process."

Physicians Unaffected

So far, the budgeting system has not really impacted physician payment in the state; doctors are getting paid the same way as other places -- generally fee-for-service or salary, according to Ransom. However, CMS, which extended the state's global budget waiver to the end of 2019, is now negotiating with other payers and Maryland Governor Larry Hogan (R) for a longer-term extension. "The positive thing is as they change the waiver, they're attempting to modify it in line with existing [physician payment] programs," such as Medicare's Merit-Based Incentive Payment System (MIPS) and its accountable care organizations, he said.

"Hospitals take a lot of [financial] risk in Maryland, and a lot of physicians work with or for hospitals, so we're asking to get credit for that risk," Ransom added, noting that the 2014 waiver "allows for more gainsharing and gives exemptions in certain circumstances from antitrust [laws] and Stark [self-referral laws], so that's a positive, and we are hoping in the long run -- and we've been promised by CMS -- that we're going to have more qualifying physician programs."

But a lot of doctors aren't even aware that this experiment is going on, Mortensen said. When she was at a meeting with Maryland physicians recently and brought up global budgets, "they had no idea what I was talking about," although they control a lot of hospital expenditures, even as non-employees.

The point of the global budget demonstration "was to get more control over total hospital spending, because under rate-setting, there were not very many controls and we weren't very effective in any event," said Antos. "Spending went much higher than had been expected. So we had to cut the rates ... [Global budgets] would give hospitals more of a sense of planning because they would know what their [rate was] on a per-patient basis."

For hospitals who seemed to be on track to spend more than their budgets, "the commission would basically either require them -- or make strong suggestions -- to stay within their annual budget by any number of things they could do," he continued. "One is that they could adjust downward somewhat the charges for patients they were seeing. However, what we really wanted them to do was make investments to reduce unnecessary hospitalization, to reduce readmissions, which really add to the cost ... Maryland hospitals responded generally the way you'd hope; they did make these investments."

Maryland's global budgeting experiment "makes some sense, but it's halfway to what makes sense," Antos added. "If we're only doing hospital services, that's going to slow down the rate of spending in [Medicare] Part A" -- which pays for hospital care -- "but we're going to see a big increase in Part B," which covers physician office visits. "And in fact, that's exactly what we've seen. I'd like to extend the system to [both parts] altogether."

Other States Also Experimenting

Maryland is not the only state experimenting with all-payer programs. In Pennsylvania, under a CMS demonstration project which started last January and runs for 7 years, rural hospitals can voluntarily work under a global budgeting system, which, like Maryland's, will include contributions from all payers in the state. The program is being aided by a $25 million, 4-year grant from CMS.

"Pennsylvania commits to achieving $35 million in Medicare hospital savings over the course of the model," according to its CMS webpage. "In addition, the growth rate of rural Pennsylvania total Medicare expenditures per beneficiary must not exceed the growth rate of the rural National total Medicare expenditures per beneficiary, making this Model budget-neutral for Medicare."

Currently, the program is in its design phase; "organizers are currently working with five potential hospital partners and the state is looking to recruit more," according to a spokeswoman for the Hospital and Healthsystem Association of Pennsylvania. One of the ongoing challenges to the program is getting the needed funds to help the hospitals make the transformation "on an ongoing basis," she said in an email. "Some rural hospitals have experienced unstable finances and need resources to assist in redesigning their physical plant, restructuring a workforce to meet the population's needs, and improving technology (such as telemedicine services)."

In Vermont, the state is experimenting with an all-payer accountable care organization (ACO) model, in which the state "will limit the annualized per capita health care expenditure growth for all major payers to 3.5%," according to the model's webpage. In addition, "Vermont will focus on achieving Health Outcomes and Quality of Care targets in four areas prioritized by Vermont: substance use disorder, suicides, chronic conditions, and access to care." That model, which began in 2017, will run through the end of 2022.

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